About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

Obama’s Proposal

US President Barack Obama did quite a number on the markets yesterday when he called for an overhaul of the banking industry. Wait, let me reword that. Obama, in his speech yesterday, declared a full-on war on commercial banks.

Remember that, in the middle of the recent global financial crisis, the US government provided its banks with cheap credit using taxpayer money as part of its stimulus package. Yesterday, Obama said that the risk taken by commercial banks is too much, and this is putting taxpayers’ money in too much danger. While the US’s financial sector has improved greatly, there really weren’t any major changes to rules and regulations that govern it.

With that said, Obama wants two things to happen:

1. Prevent financial institutions from engaging in proprietary trading and investing activities which would have no benefit to its customers

2. Limit the growth of liabilities large financial institutions undertake

First, allow me to explain what proprietary trading means. Proprietary trading is the use of the banks’ own money to trade and invest in the financial market for their own profit. While this activity is not a major source of their profits, disallowing them from doing so would still squeeze their income.

Moreover, Obama’s second proposal to limit the growth of bank lending will have a direct impact on operations of banks as this would force them to be a little more tight-fisted with lending. Remember that banks mainly operate by acquiring deposits from consumers and lending these funds out to borrowers for profit. Also, since banks would no longer be able to profit from complex financial dealings, they might charge higher rates on their loans in order to compensate.

Take note that Obama is pushing for these proposed reforms with the American public in mind. The President is hoping that banks would go back to the basics and K.I.S.S. (Keep it simple, stupid!): Pay a certain rate of return for deposits, charge an interest rate for loans, and do away with those complicated financial securities that gives the average Joe headaches.

Since banks would no longer be allowed to trade complex and risky products which contributed to the financial system’s near collapse, the reforms would make the banking system much safer for ordinary Americans. Consumers would also be protected against banks that use their hard-earned money in deposits to make speculative investments.

The question now is this: How will financial markets react if these proposals do push through?

A look at yesterday’s trading session shows that these proposals could put some muscles on risk aversion. Since such rules would limit risk, I suspect investors could be forced to unwind their positions in riskier assets. We saw this yesterday, when investors and traders alike ran back to the safe havens. The yen went on a rampage across the board, carried by the strength of the down move in the USDJPY.

Based on the initial reaction, it seems that the yen would be the clear cut winner. However, given how bleak Japan’s outlook is, I don’t think we can count out the dollar just yet. In the end, it may be a question of timing. If and when these proposals are passed into law, will the global economy still be unstable? Or will they have recovered, giving investors other options to run to? Only time will tell.

2 comments

First of all, let’s not blame the banks for the financial collapse. This collapse was foreseen 4 years ago when certain members of Congress warned that this was on the horizon, not because of what banks were doing, but because of what the government was forcing them to do in addition to the lending practices of Fannie Mae and Freddie Mac. Those last two were DOA from inception. This collapse is a direct result of Socialists interfering in the market by, once again, attempting to redistribute wealth, in this case, indirectly through bank lending practices. What we all should do is pull out a copy of Thomas Sowell’s Basic Economics if you want to talk about going back to the basics. Free market principles will keep people safe from the banks. As if we need Obama to protect us; that’s a joke of epic proportions. Banks want to make money, and they will regulate themselves when it comes to lending and investing, and thus the reason we are in this mess, because the government coercing banks to step outside of normal practices. Without the government’s involvement and the methodologies of Fannie Mae and Freddie Mac we would not be in this mess. Let us not revise history, Obama has done nothing but propose and implement Socialist ideas, and will do nothing but destroy what’s left of a free market, and he’ll bring the US down with it. His proposals are smoke screens to cover up the shit hole he and his colleagues have created. The reality? We’re going to step in it anyway, because by controlling banks(and telling us it’s for our own good -laughable) it allows him to control the whole private sector. I just don’t understand why people can’t see this. With this guy, we’re going to make our own bed. . .and lie in it.

First of all, let’s not blame the banks for the financial collapse. This collapse was foreseen 4 years ago when certain members of Congress warned that this was on the horizon, not because of what banks were doing, but because of what the government was forcing them to do in addition to the lending practices of Fannie Mae and Freddie Mac. Those last two were DOA from inception. This collapse is a direct result of Socialists interfering in the market by, once again, attempting to redistribute wealth, in this case, indirectly through bank lending practices. What we all should do is pull out a copy of Thomas Sowell’s Basic Economics if you want to talk about going back to the basics. Free market principles will keep people safe from the banks. As if we need Obama to protect us; that’s a joke of epic proportions. Banks want to make money, and they will regulate themselves when it comes to lending and investing, and thus the reason we are in this mess, because the government coercing banks to step outside of normal practices. Without the government’s involvement and the methodologies of Fannie Mae and Freddie Mac we would not be in this mess. Let us not revise history, Obama has done nothing but propose and implement Socialist ideas, and will do nothing but destroy what’s left of a free market, and he’ll bring the US down with it. His proposals are smoke screens to cover up the shit hole he and his colleagues have created. The reality? We’re going to step in it anyway, because by controlling banks(and telling us it’s for our own good -laughable) it allows him to control the whole private sector. I just don’t understand why people can’t see this. With this guy, we’re going to make our own bed. . .and lie in it.